Better battery: A123 Systems’ new factory in Livonia, Michigan will make advanced batteries for hybrid and electric vehicles.

Between 2000 and 2010, the number of manufacturing jobs in the United States declined by 34 percent—a loss of more than six million positions. For now America remains one of the world’s greatest manufacturing powers—it makes 19.4 percent of the world’s manufactured goods, a share that fell only slightly over the past 30 years and is right behind China’s share of 19.8 percent. But hard questions remain about the future of production in an advanced industrial country like the U.S. The latest research suggests that the big recent decline in manufacturing jobs is due not only to increases in productivity, as we long thought, but also to large gains for Chinese imports.Do these global trends mean that manufacturing has a limited future in a high-wage country? Does the U.S. even need much domestic production when manufacturing has become a commodity that can easily and cheaply be purchased abroad? As the economy becomes more heavily dominated by services, why focus on manufacturing at all?

These questions have very old roots in American political economy. At the very beginning of the Republic, Alexander Hamilton was already arguing for industrial policies that would stimulate domestic production. More recently, in the 1980s, the rapid gains made by Japanese companies in industries like automobiles and consumer electronics stirred up huge political controversies over whether government should stave off this competition and try to sustain and revive U.S. manufacturing. The advocates for such policies argued that manufacturing plays a critical role in generating economic growth and employment opportunities and in assuring national security. The critics of industrial policies claimed that government was incapable of making good choices about industry—that it could not pick winners and losers. More fundamentally, the critics denied that there was anything special about manufacturing as distinct from other activities in the economy, or that any kind of manufacturing was more valuable than any other. As the director of the Office of Management and Budget in the first Bush administration put it: “Potato chips or silicon chips—who cares? They are both chips.”

There is at least one great difference, however, between yesterday’s concerns about manufacturing and today’s. Over the past 25 years, a fundamental change in the structure of production has taken place, as digitization and modularity have made it possible to separate R&D and design from production in industries where these functions had previously been integrated within corporations. The experiences of successful firms over the past 30 years make it plausible to think that manufacturing can be outsourced and offshored without any damage to the engines of innovation. Once it was possible to codify the different stages of the journey from conception to final product and to break design apart from production, major new industries could arise around enterprises like Apple, Qualcomm, and Cisco. With the fragmentation of networked production, companies focused on specialized core competencies came to dominate the landscape, particularly in sectors linked to information technology. The great new U.S. companies of the past quarter-century have been ones with few if any manufacturing capabilities. Many of the vertically integrated giants, like Hewlett-Packard and Texas Instruments, also shed their manufacturing, outsourcing much of it to Asian contractors.

The IT industry came to provide the basic paradigm for thinking about industrial change. Given the spectacular success of companies like Apple and Dell, they were obvious models to emulate. Their example suggested that advanced industrial countries should focus on their comparative advantage in R&D, design, and distribution and leave manufacturing to less developed countries, with their large reserves of less educated, less demanding, low-wage labor. Research carried out by Dedrick, Kraemer, and Linden, with “tear-downs” on the composition of value in iconic products like the iPod and the iPhone, showed that the lion’s share of the profits and high-paying jobs continued to accrue to companies and workers in the advanced industrial countries. In a $600 iPhone sold by Apple, assembly in China by subcontractors like Foxconn (Hon Hai) accounted for less than $7 of the cost, so why should Apple—or any other high-tech company—consider bringing production under its own roof? Collaboration between firms specializing in R&D and design in advanced industrial countries and those specializing in manufacturing in low-wage countries has greatly benefited both sides over the past quarter-century, but it seems clear which end of the bargain has been the better one. Indeed, as a matter of public policy it would be hard to see the rationale for bringing such jobs “back” to the United States.